Background: Jonathan Duhamel's Poker Winnings and Canadian Taxation
In 2010, Jonathan Duhamel won the most prestigious Texas hold'em poker tournament: the annual World Series of Poker Main Event. The prize for the winner, the player who could outlast the 7,318 other players in the field was just under $9,000,000 USD. He further won $383,916 in 2011, and $106,775 in 2012, as cash prizes for his high-ranked finishes at various poker tournaments. Unfortunately for Mr. Duhamel, the Canada Revue Agency (CRA) decided that these winnings should be taxed as business income, moving away from the decades of precedent concluding that poker winnings were not taxable.
On June 21, 2022, Jonathan Duhamel won a significant victory at the Tax Court of Canada. Justice Lafleur decided that his poker winnings from 2010 through 2012 should not be included in his income as per Sections 3 and 9 of Canada's Income Tax Act. A lengthy judgement upheld years of case law which indicated an exceptionally high bar for gambling winnings to be included as income.
Canadian Income Tax Act and the Source Concept of Income
Section 3 of Canada's Income Tax Act determines that for income to be taxed under the Tax Act, it must come from a "source". The Tax Act provides office, employment, business, and property as the typical sources, but indicates that this list is not exhaustive. A mixture of legislation and case law have provided guidelines as to what types of income correspond with each source. Under Canada's Income Tax Act, the characterization of income type is determined by source, and not vice versa. For example, an increase in the value of a taxpayer's real property, on disposition, may be considered income from the business source or the property source. This determination, of course, dictates the tax consequences.
Canadian tax legislation and case law have remained strict on the source concept of income. Generally, if the income does not fall within a recognized source, it is beyond the scope of the Act, and therefore not taxable. Gambling winnings, for example, are one key income stream which falls beyond the scope of any source of income. In the U.S.A., however, all gambling winnings are taxable. This gambling tax makes gambling winnings significantly more tax advantageous in Canada than in the U.S.A.
Taxation of Poker Winnings in Canada
For poker winnings to be considered business income, the winnings must be in the context on an activity that constitutes a business for the purposes of the Act. In Stewart, the 2002 Supreme Court of Canada case, the Court provided a two-step test to determine whether a source of business (or property income) exists for the purposes of the Act. The two stages consist of the following questions:
- Is the activity carried out with a view to making a profit, or is it a personal endeavour?
- If it is not a personal endeavour, is the source of income a business or property?
In the context of gambling winnings, the second prong of the test is irrelevant. Instead, the first prong acts as the key question to which determination is sought.
There are a further two sub-prongs which assist in answering the question for each taxpayer's case. The first asks whether there is some subjective personal or hobby element concerning the activity in question: was the activity undertaken in pursuit of profit or was it a personal endeavour? In other words, was the predominant intention to make a profit? It is important to note that a personal endeavour with a sufficiently "commercial" manner, will also constitute commerciality and therefore business income. For example, an amateur tennis player may play at local tournaments, and even win a cash prize. This, however, is unlikely to amount to the level of commerciality necessary to constitute business income. On the other hand, a professional tennis player, who plays tennis full time and employ a team of coaches and professionals to enhance their performance, will likely be sufficiently commercial for the tournament winnings to be characterized as business income.
The second sub-prong asks an objective question: does the undertaking, from an objective point of view demonstrate that the activity was taken in a sufficiently commercial manner. Key factors include:
- Profit or loss experienced in the past,
- Taxpayer training and experience,
- Taxpayer's intended course of action,
- Whether the taxpayer created a business plan,
- Capability of the venture to show a profit,
- Reasonable expectation of profit.
The Court affirmed that the key inquiry is in determining the commercial nature of the activity. It is critical, the Court found, not to second guess the business acumen of the taxpayer, as hindsight bias after a failed venture can easily distort from undertaking an accurate assessment of the commerciality determination. The Court also noted that this list of factors is not exhaustive, and that various activities may require additional factors for their determination. In Duhamel, the Tax Court of Canada affirmed this precise notion: for gambling winnings in particular, an analysis of the objective standards of business, such as whether there was a reasonable expectation of profit, is not determinative.
In Tarascio v The Queen 2012 FCA 30, the Federal Court of Appeal concluded that the approach taken in determining gambling winnings (such as horse racing, slots, and lotteries), must utilize whether the activity is "carried on in a sufficiently commercial manner, that is to say with the subjective intention to make a profit supported by objective evidence of serious business conduct." One problem with poker winnings, in particular, is that all poker players want to win, and therefore are pursuing profit. How can you truly distinguish between commercially sufficient and non-commercially sufficient poker players?
To answer this question, the Courts have employed additional factors to make this determination. First, there must be evidence of a consistent risk management or mitigation system. Without such a system, it exceptionally challenging to call the gambling activity commercial. Simply put, if gambling hinges on a large amount of luck, without somehow reducing the variance created by luck, it is very difficult to characterize the activity as a business. More recent case law indicates that such a system must also demonstrate the seriousness of the taxpayer and their approach to winnings.
Second, the Court must consider the skill, knowledge, and competence of the taxpayer. Whether the taxpayer has some taken courses or training, their academic knowledge, and their experience with gambling are all factors to consider in this enquiry. Merely playing a significant amount of poker, for example, will not be sufficient to meet this criterion. In Leblanc v The Queen 2006 TCC 680, 2007 DTC 307 the Court concluded that "Gambling - even regular, frequent and systematic gambling - is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances." The CRA has cited this quotation in IT Folio S3-F9-C1.
To summarize the case law, regular tax winnings are not, and have not been, taxable income in Canada. Because of the element of luck and the nature of gambling, the Courts have determined that in all but the most exceptional cases, gambling winnings (such as poker winnings) are not constitutive of business income. Simply, the manner of action is not commercial enough to be considered a business.
Tax Court of Canada's Decision in Duhamel c. Canada,  A.C.I. no 49
In Duhamel, the Canada Revenue Agency (CRA) reassessed Mr. Duhamel for his poker tournament winnings from nearly a decade prior. They argued that his skill level, as well as his publication of his book "Cartes sur table: Champion du monde de poker 2010" provided evidence that Mr. Duhamel had acted in a business-like manner, and that the winnings ought to be taxable business income. The CRA asserted that his book evinced a system which mitigated risk and allowed him a skill-based edge against the other players. Further, the CRA argued that Texas hold-em in particular, the poker game Mr. Duhamel played, was a skill-oriented - rather than luck-focused - game, which in the long run, could provide a considerable edge for a "better" player.
The Court, however, rebuked this assessment. First, the Court concluded that, in particular, Mr. Duhamel's winning the particular tournament that he did, was a result of chance. It was one tournament, the WSOP Main Event, which kept Mr. Duhamel financially afloat, and without the enormous cash prize, Mr. Duhamel would be financially ruined. It was pure luck that he won this tournament rather than another.
Second, the Court pointed out that even if poker was a game in which skill prevailed over luck, the Court could not determine that Mr. Duhamel's activities amounted to a business, rather than a hobby or form of entertainment. His actions were not sufficiently organized, he did not employ, with enough consistency and seriousness, a risk mitigation strategy, and he did not possess the training, skill, and competency required in order to run a business.
In conclusory remarks, the Court asserted that Mr. Duhamel's actions do not amount to actions that a businessman would undertake. This confirms his assessment of the hobby or entertainment nature of his poker winnings. Just like other poker players, Mr. Duhamel played to win, and he won. That does not mean that his winnings are necessarily those of an active business.
Legal Conclusion: The Tax Liability of Gambling
What remains clear from this case is that Courts continue to regard gambling winnings as non-taxable income. The winnings of regular poker players, who do not employ sophisticated risk mitigation technology and/or strategy; who do not have sophisticated training and immense experience; and who do not act in a business-like manner in terms of their gambling activities, will not be taxed as business income. However, it is important to note that there are certain gambling-related activities that the Courts have determined constitute business income.
In Luprypa v R , the Court ruled that a "pool shark", (a skilled pool player) received business income. Luprypa would challenge inebriated individuals to games of pool and produce income. The context of a skill-based game, alongside near certain victory, provided the backdrop for the Court's decision. In The Queen v Poynton,  CTC 411, 72 DTC 6329 (Ont. C.A.) the Court ruled that profits derived from bookmaking or operating a gaming establishment (legal or illegal) constitutes income from a business.
Pro Tax Tip: One key element in determining whether winnings (whether gambling, sports, or other endeavour) are characterized as business income is whether there is a personal or hobby element. If the primary intent of the endeavour relates to the taxpayer's hobby or personal entertainment, then it is likely not to be considered business income. It is important to note that a hobby undertaken in a sufficiently "commercial" manner can be characterized as business income. To make sure you are properly reporting your gambling winnings contact one of our knowledgeable CRA tax lawyers.
Are my poker winnings taxable?
Generally, poker winnings are not taxable income as per Section 3 of Canada's Income Tax Act. Unless you are acting in a sufficiently business-like manner, employing enhanced risk-mitigation methods and/or technology, have significant training, and act with the intention of profit, it is highly unlikely that your poker winnings are taxable.
If I am a bookmaker, is my income taxable?
Generally, yes. If you determine gambling odds and receive and pay bets, your income is taxable under Sections 3 and 9 of the Income Tax Act. However, such a determination is fact specific, and you may require legal assistance for such an assessment.
If I reported my poker winnings as income from a business, is there anything I can do to get the money back?
Yes. You can file a T1 adjustment Request with the CRA. However, if the CRA rejects the request, then you may file a Judicial Review Application in Federal Court under Section 18.1 of the Federal Courts Act. Our experienced Canadian tax lawyers can help you in filing your judicial review application.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a Canadian tax lawyer."
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